The Evolving Taxation Of Derivatives

This is article is part of a series dealing with draft legislation released for comment by the Department of Finance on July 29^th. Read the complete series:

• Sales of linked notes
• Taxation of switch fund shares

Certain derivatives held on income account have been treated as inventory for tax purposes, thereby allowing the deduction of unrealized losses on such derivatives. This treatment was supported by the 2015 decision of the Tax Court of Canada in Kruger Inc. v. The Queen (2015 TCC 119), holding that certain foreign exchange related derivative contracts owned by the taxpayer at its year-end were inventory, and that the taxpayer was permitted (likely required) to value such derivatives at the lower of cost or FMV pursuant to section 10 of the ITA. The result is an asymmetry: taxpayers deduct unrealized losses on such derivatives under section 10 of the Income Tax Act (Canada) ("ITA") while having no corresponding requirement to include unrealized